As a millennial, I still remember the feeling of walking through the farming stalls early in the morning, chatting with chubby milkmen, and haggling over the price of chicken. Farmers used to come to the old part of town, set up their makeshift kiosks, spread the tablecloths, and lay out their produce in elaborate heaps for display. Now, instead of a market, there is a shopping mall.
Before the advent of grocery stores and malls, farmers used to have a small pool of loyal customers where relationships were close and healthy. The geographical barriers and a small number of competitors enabled farmers to thrive locally. The development of infrastructure, the emergence of different modes of transport, globalization, and the Internet have changed all that.
The interest in selling direct to consumers, however, has re-emerged in the last few years. For example, during the pandemic, we saw companies that were historically reliant on distribution partners launch online portals for select products in an attempt to deepen the relationship with the end customer.
While benefits for sellers are clear (customer data, less reliance on third parties), benefits for buyers are less obvious. Especially when consumers have become deeply accustomed to the way they have been buying for the last decade. Moreover, the growth of direct channels won’t last forever and will eventually satiate the market. So if a company wants to test D2C channels, there’s no better time than now.
The question is: how can companies leverage the power of D2C strategy to do a better job of understanding what a customer requires? In this article, we’ll explain what D2C actually means and what companies can do to find the right balance between channels, products, and prices and create a better omnichannel experience.
What is D2C
Direct-to-consumer (DTC or D2C) refers to selling products or services directly to end customers, bypassing any middlemen, such as wholesalers or retailers. End customers don’t necessarily have to be physical entities but companies too, as long as they were previously available only through intermediaries.
Benefits & Drawbacks of Going D2C
In this section, we’ll explore both advantages and disadvantages of a direct-to-customer business model.
Advantages of D2C
Better relationships and increased brand loyalty
One of the principal advantages of a D2C approach is the model’s customer-centricity. A true D2C strategy delivers an intuitive, omnichannel, and user-centric experience that encourages customers to have a direct relationship with a brand rather than resort to buying the brand’s products through an intermediary. Consequently, a better relationship between the business and end customers results in stronger brand loyalty.
Online direct-to-consumer businesses enjoy lower costs than their physical counterparts because they have reduced the number of different business components, such as employees, renting or building a brick-and-mortar store, and supporting relationships with third-party vendors and partners.
Wider customer base
Online D2C businesses are no longer locally confined but can reach wider audiences, expanding to new markets at a faster rate without the need to rely on intermediaries. A wider customer base can also be achieved by implementing a marketplace channel and adding existing partners to the network. This way, instead of undermining relationships with intermediaries, the business creates a symbiotic relationship within a broader ecosystem which connects end customers with all parties involved in a supply chain.
Faster and smarter growth
D2C enables smaller companies to grow more quickly and compete with larger businesses because of faster shipments, product availability, and quality of service. Creating products and testing new ideas also becomes easier with a digital D2C channel – once the company creates a new product, it launches the product on its digital portal, gathers feedback, and reverts with a better iteration if necessary.
Access to data
Companies that are selling through third parties miss out on opportunities to gather customer data. Selling directly to customers implies access to granular socio-economic and geographical data which can be employed for targeted personalization and contextualization. Access to data also means better and more sound decision-making, forecasting, innovation, distribution, and price management.
Disadvantages of D2C
By selling directly to the consumers, businesses face the risks that were previously the responsibility of intermediaries like wholesalers or retailers. These risks include labelling, shipping, returns, and cybersecurity.
In switching from the model with a few distributors to delivering products to many individual customers, companies increase the complexity of the distribution chain, which, in turn, bears pertinent risks.
Going D2C requires not only sophisticated infrastructure but market expertise, and frameworks for shipping orders and owning consumer data. Investing in the lacking competencies may draw resources away from a company’s core products, which, in turn, can result in customer erosion or damage a relationship with existing partners.
The harbingers of success in D2C are often an exclusive offering or a differentiated value proposition, product bundling, auto-reorders, and additional services.
Want to add a new digital channel to your existing ecommerce solution? Virto Commerce can help. Schedule a demo now and see how you can leverage the power of D2C and unlock new revenue opportunities with Virto’s ecommerce solution.
Let’s summarise the benefits and drawbacks of a D2C business model in the following table:
Benefits of D2C
Drawbacks of D2C
– No middlemen imply higher profit margins and more control over profits
– A shift in responsibilities (your business is in charge of everything from production to distribution)
– Access to granular socio-economic and geographical customer data, which can be employed for targeted personalization & contextualization
– Responsibility for consumer data
Increased liability over risks previously shared with third parties
– More room for creativity and testing of concepts
– Substantial marketing effort because of increased competition
– Increased brand loyalty and customer engagement
– Complex supply chain
How to Create a Better Omnichannel Experience with D2C
The following practical strategies will help you promote excellence in growing D2C and create a better omnichannel experience overall:
Leadership commitment to D2C
To succeed in D2C ecommerce, your company’s leadership needs to be “all hands on deck” – that is, wholly dedicated to prioritizing D2C ecommerce, at least during planning, implementation, and first iterations before ensuring it can be safely rolled out and set to float freely. First, clarify the strategic role behind your D2C ambition, including target customer segments for D2C versus other channels and any other guidelines for the value proposition to design and deliver. Success in ecommerce calls for unprecedented levels of cross-functional and cross-channel collaboration, so it’s important that the CEO and Board are fully behind the D2C plans.
Appropriate infrastructure and technology
In order to function at scale, a successful ecommerce company needs the appropriate infrastructure and technology. To successfully implement a D2C initiative, you must have the right talent and technology and create a new IT infrastructure – significant adjustments that may lead to more complexity and higher risk. Therefore planning ahead, acquiring the required resources, and building the necessary infrastructure are critical.
An effective technique to implement resource reallocation is a “Y+1” investment logic, which requires the adjustment of resources and investment in advance of growth in accordance with the revenue that is expected in a quarter or a year in the future. Although this strategy would overinvest in D2C ecommerce relative to other areas of the business, it would help the company get ahead of the competition.
Another beneficial approach is known as an "external investor attitude," which, by putting long-term profits first, prioritizes expansion above profitability. By expanding and investing early, you are more likely to capture a larger share of a growing D2C channel.
However, what’s still a matter of debate is how to prioritize investments and reallocate the resources to get ahead of the competition. One way to assess digital investments is based on the anticipated cash flows, including base-case and “do-nothing” scenarios. For ecommerce, however, the “do-nothing” scenario often means gradual depreciation of value. Whatever method is used, you need to try to find creative ways to decide on how many resources (and where) you’re willing and able to allocate to your new ecommerce project.
Attract and retain talent
Finding and recruiting the right people may be challenging and requires monetary, structural, and cultural improvements. Due to the scarcity of talent and the intense competition, finding the appropriate talent may require a fundamental rethinking of conventional approaches.
One of the methods to approach the talent challenge is to choose high performers from the rest of your company and reallocate them to a new D2C project. To help people start their jobs quickly and integrate within new teams, consider structured training programs.
Otherwise, try to find experienced people from other organizations and lure them into the leadership of your new project. Or consider acquiring a startup or smaller organization that already has an established, well-working D2C channel.
Articulate a bold CX vision
The most successful ecommerce companies have all implemented scalable CX solutions, such as responsive mobile and web experience design, convenient pick-up and delivery choices, and personalization/recommendation options.
CX and UX choices should be based on a thorough understanding of consumers' demands in terms of experience, delivery, service, and product. Thanks to the growing availability of different digital tools, you may now quickly obtain and evaluate real-time, customer-level data (to supplement survey-based insights), which can be used to assess, shape, and optimize a whole set of customer journeys. Enamored with such data and valuable insights, you can then leverage technology to implement changes at scale.
Click on the banner below to learn more about digital CX and tips to improve it.
McKinsey research indicates three key components that encourage recurring, long-term relationships with customers – a subscription-based business model, aftersales service, loyalty programs, and brand communities that engage with customers on an emotional and social level. Loyalty programs are an especially effective alternative to a subscription model. However, contrary to expectations, the recent explosion in loyalty programs has not boosted customer engagement but has instead made consumers pickier about which programs they choose to participate in. In the USA alone, there are five billion loyalty program membership accounts, yet only 55% of users actually use the programs they sign up for. Loyalty programs, however, may provide enormous value when they are implemented well and are twice as likely to increase the frequency of purchases. Loyalty programs can be used for a variety of purposes, from retaining customers to gaining valuable customer data.
If you’re interested in learning how loyalty programs can help you get access to more customer data, consider reading one of Virto’s use cases where Virto helped Bosch Termotechnique build a loyalty portal to bypass middlemen and get direct access to customers. A summary of this case study is included in the next section.
Virto Commerce D2C in B2B Use Cases
Our experience has shown that the D2C model can be seamlessly replicated in the B2B context. The customer in the equation can be anyone from a retailer to an individual, as long as they are the end users of products.
To illustrate how the D2C concept can be implemented in B2B, we’ve included here two projects undertaken by Virto Commerce.
Bosch Thermotechnik (or Bosch Thermotechnology) is a Bosch subsidiary that offers indoor climate solutions, water heating, and decentralized energy management. Bosh Termotechnik’s customers are construction companies and installation crews.
Traditionally, the company relied on its distribution channels for completing the final sale and could only guess if distributors worked well enough to support the Bosch brand.
To gain access to customer data, Bosch Thermotechnik wanted to create a digital customer loyalty program that would allow it to interact with the customer directly.
With Virto Commerce, Bosch has built the Webshop for Sales Digital Unit, which now supports sales with an established loyalty program, lead management system, and customer pages.
Customers can register the Bosch equipment on the portal and receive loyalty points in return, which they can later use to buy other products and equipment from Bosch partners.
Bosch customers can’t register to receive the points anonymously – they need to provide sufficient information for the company’s representative to get in contact with them and ask relevant questions regarding their purchase. This way, Bosch not only gains information about its end users but also insights into customer satisfaction.
The company can also influence customer decisions by offering them newer or older but better equipment through automated recommendation and personalisation options.
Although retailers sell beer to individuals, manufacturers still perceive retailers as their end customers.
To have more information about their end customers, HEINEKEN used Virto Commerce to develop a B2B ecommerce portal where HEINEKEN’s distributors can sell beer directly to retailers.
Launched first in APAC in 2018, the Virto Commerce B2B solution is now a core part of HEINEKEN’s digital B2B ambitions covering half of its 30 markets globally with billions in revenue.
Distributors now communicate with the retailers, organize the logistics, and check the retailers’ finances (outstanding debit/credit) with the end customer from HEINEKEN’s portal.
The brewer now controls the retailers’ data and has access to crucial data such as who buys what and how much.
The company can also influence retailers by providing them with recommendations on hot deals, promotions, and new types of beer. The brewer can also forecast demand by utilizing the collected data as well as receive feedback on the work of their distributors.
As discussed, businesses have moved beyond the ‘Dollar Shave Club’ model and chosen more sophisticated frameworks where the path to the end customer doesn’t necessarily involve a new product but the use of existing resources or the extension of the current B2B ecommerce platform to include a new channel.